The Storm Rolls In: UBS Downgrades KBR on Cloudy Earnings Visibility

In a report published Tuesday, UBS analyst Steven Fisher downgraded

from Buy to Neutral and lowered the price target from $33.00 to $26.00 due to cloudy earnings visibility through 2014. Fisher presented some near-term concerns with KBR, including the CEO replacement, Stuart Bradie, not starting until June. The analyst commented, “major initiatives may not be implemented in the near term. The bookings outlook is sluggish, and newly disclosed contract issues are a headwind. However, the stock could be lifted by buybacks and could become an activist target.” UBS added that they see a downside if a customer agreement is not reached for the “troubled” Canadian projects. Fisher remarked that stock is unlikely to break out until bookings outlook improves, which management suggests is not likely until 2015. He wrote, “That said, when the new CEO starts next month, we expect KBR to embark on a more aggressive operational improvement plan. We would expect a review of controls, costs, strategy, and personnel, with changes made in all of the above. We expect this to add some investor confidence, and perhaps add modestly to 2015 earnings.” The analyst lowered 2014 and 2015 EPS estimates from $1.97 and $2.30 to $1.85 and $2.05, respectively. Fisher noted that the decrease in estimates reflects the “zero profit impact on revenues on loss projects” and to take into account additional losses on the MSA contract. Shares of KBR closed at $24.23 on Monday.